The importance of a common vocabulary in venture capital
Many of the debates within venture capital are driven by nothing more than the lack of standard terminology.
Investors will argue over ideas with no hope of reconciliation, because they simply do not share a common definition for the concepts involved. Worse still, these shifting definitions undermine decades of research and understanding.
A common antagonist in these scenarios is “consensus”.
In one corner, you have the Thielian purists, who insist venture capital is a game of being “contrarian and right”, and consensus is intrinsically toxic to returns.
In the other corner, you have a more modern view of consensus in a larger market, which sees it as a necessary force to pull downstream capital into companies.
Both observations have merit, but only one talks about consensus in a practical manner.
If venture-backed companies must develop consensus to encourage downstream investment, then consensus just means “obviously a good company”. That’s fair, but not very useful.
On the other hand, the traditional view of consensus is a binary market condition. You are either in a consensus category, and experience the associated momentum of investment, or not.
The latter is clearly more meaningful. Consensus is not incremental and individual, it is a binary and relatively slow-changing market condition.
This is a minor distinction, but an important one.
Consensus, as a term for the momentum-driven behaviour of investors, is a major force in private markets. It has been studied across cycles, with decades of valuable analysis produced.
Consensus, as a term for individual companies becoming more obviously attractive, is a fairly meaningless concept and actually obscures what we already understood about consensus.
This confusion leads well-intentioned people to make statements like “consensus is good, actually”, which is a self-evident platitude under the modern definition, and mind-numbingly dumb under the traditional definition.
If venture capital is to evolve into a sophisticated asset class, it would be helpful if there was a shared understanding of the key concepts, and a familiarity with the underlying principles.
Catching Outliers: Committee Voting and the Limits of Consensus when Financing Innovation
Andrey Malenko, Ramana Nanda, Matthew Rhodes-Kropf, Savitar Sundaresan
This paper studies how different levels of consensus in VC investment committee voting rules affect performance. It shows that a low-consensus “champions rule” (one partner can unilaterally approve) is optimal for early-stage investments with heavy-tailed returns because it better catches high-performing outliers, while higher-consensus rules (majority or unanimity) perform better in later stages. Supported by a survey of the 50 largest U.S. VC firms and theoretical modeling.
And the Children Shall Lead: Gender Diversity and Performance in Venture Capital
Sophie Calder-Wang, Paul A. Gompers
This paper examines how excessive internal consensus and groupthink in homogeneous VC teams harm performance. Using an instrumental variable based on VC partners’ children’s gender, it finds that greater gender diversity reduces conformity, improves decision-making, and leads to significantly higher deal success rates and fund-level excess returns.
How Do Venture Capitalists Make Decisions?
Paul Gompers, Will Gornall, Steven N. Kaplan, Ilya A. Strebulaev
This large-scale survey of U.S. venture capitalists documents the prevalence of high-consensus decision rules inside VC firms (roughly 50% require unanimous votes, 20% use consensus with veto power). It highlights that the performance implications of these varying levels of required internal consensus remain an important open question for future research.
Herd Behavior in Venture Capital Market: Evidence from China
Rui Zhang et al.
This paper investigates market-level herding (a form of consensus where VCs follow each other into the same deals and sectors) in the Chinese venture capital market. It finds that such herding behavior has a statistically significant negative effect on VC firms’ exit performance.
The Non-consensus Entrepreneur: Organizational Responses to Vital Events
Elizabeth G. Pontikes, William P. Barnett
This paper analyzes how “vital events” (spectacular VC financings or bankruptcies) shape collective beliefs and drive consensus or non-consensus market entry. Using data on 4,566 software startups (1990–2002), it finds that consensus entrants (herding into hot markets after positive events) are less viable, more likely to exit early, and less likely to receive funding or go public. Non-consensus entrants (entering stigmatized markets after negative events) face higher scrutiny but are significantly more likely to survive, secure funding, and achieve IPOs.
(top image: The Intervention of the Sabine Women, by Jacques-Louis David, 1799)
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